Vetle Lunde, senior analyst at K33 Research, issued a firm statement warning regarding the practices of prominent cryptocurrency exchanges regarding the authenticity of liquidation data. In a post on X, Lunde describes how exchanges like Binance, Bybit, and OKX have systematically modified their data reporting processes in a way that he claims significantly distorts the true scale of market liquidations.

Why Cryptocurrency Liquidation Data Is False

At the heart of Lunde’s argument are the changes these exchanges made in mid-2021. For example, both Binance and Bybit adjusted their liquidation WebSocket APIs to report only one liquidation per second, ostensibly to “ensure a ‘fair trading environment’” and “optimize user data streams.” Similarly, OKX introduced a cap, limiting reporting to one order per second per contract.

Lunde explains that this modification of the data stream has a profound effect on market transparency, leading to a scenario where liquidation data, a key metric for gauging market health and trader behavior, is “vastly underestimated.” According to Lunde, this has been the case for the past three years, which has implications not only for traders but also for the broader financial analysis of the cryptocurrency market.

Historically, liquidation data has served as a barometer of market leverage levels and has been helpful in understanding how traders react to sudden price swings and volatility. Accurate liquidation data helps in gauging the market’s risk appetite and in assessing whether the market decline has effectively cleared out excessive speculative leverage positions. Because this data is currently undervalued, Lunde suggests that traders and analysts are operating in the gloomy.

Lunde speculates on the motives behind these changes, suggesting they may be driven by a desire to control the narrative around market stability and trader success. He notes that high-profile liquidations were a common topic of media and social media discourse in the first half of 2021, often painting a picture of high risk and volatility in cryptocurrency markets. By limiting the visibility of such events, exchanges may be attempting to project a more stable and trader-friendly image in order to attract and retain users.

“I suspect it’s a PR choice. Liquidation tops were Twitter, media, and everyone’s daily bread in the first half of 2021. Being consistently at the top of liquidation charts doesn’t align with the strategy of getting as many people to trade as much volume as possible,” Lunde notes.

Complicating matters further, Lunde suggests that exchanges may be withholding liquidation data to maintain a competitive advantage. “Some exchanges even have stakes in investment firms that can trade on information the rest of the market doesn’t have,” the researcher speculates.

Despite these significant challenges in accessing reliable data, Lunde discusses alternative methods for estimating current liquidation volumes, such as analyzing changes in open interest or using historical data to extrapolate current trends. However, he acknowledges that these methods have their drawbacks. They often do not accurately reflect changes in market participant behavior over time or may overemphasize unusual market events that are not indicative of broader trends.

In closing his post, Lunde expresses deep skepticism about the usefulness of currently available liquidation data. He calls for a return to the levels of transparency seen in the past, although he pessimistically notes that such a change is unlikely in lithe of current trends.

“For now, liquidation data is mostly misguided entertainment and cannot be acted upon. I would welcome a return to the old transparency, but I think we have already crossed the Rubicon,” Lunde concludes.

At the time of going to press, the BTC price was $59,540.

Featured image created with DALL.E, chart from TradingView.com